Guarantor and Non-Guarantor Subsidiaries

On January 20, 2010, the Company issued $600.0 million aggregate principal amount of the 2018 Notes and 2020 Notes. In addition, on January 22, 2013, the Company issued $300.0 million aggregate principal amount of the 2023 Notes. The Company’s obligations under the 2023 Notes and the 2020 Notes are, and prior to January 22, 2013, the Company’s obligations under the 2018 Notes were, guaranteed by certain of the Company’s domestic subsidiaries (the “Subsidiary Guarantors”). Each of the Subsidiary Guarantors is 100% owned by the Company and all guarantees are joint and several. The Senior Secured Notes are not guaranteed by certain of the Company’s domestic subsidiaries or any of the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”).

Pursuant to the terms of the indentures governing the Senior Secured Notes, the guarantees are full and unconditional, but are subject to release under the following circumstances:


•	Upon the sale of the subsidiary or all or substantially all of its assets;


•	Upon the discharge of the guarantees under the credit facility and any other debt guaranteed by the applicable subsidiary provided that the credit facility has been paid in full and the applicable series of senior secured notes have an investment grade rating from both Standard & Poor’s and Moody’s;


•	Upon designation of the subsidiary as an “unrestricted subsidiary” under the applicable indenture;


•	Upon the merger, consolidation or liquidation of the subsidiary into the Company or another subsidiary guarantor; and


•	Upon legal or covenant defeasance or the discharge of the Company’s obligations under the applicable indenture.

The guarantees of the 2018 Notes were released on January 22, 2013, upon the discharge of the 2018 Indenture.

Pursuant to the terms of the indenture governing the 2023 Notes, the guarantees are full and unconditional but are subject to release under the following circumstances:


•	Upon the sale of the subsidiary or all or substantially all of its assets;


•	Upon the discharge of the guarantees under the Senior Secured Credit Facility, the 2020 Notes and any other debt guaranteed by the applicable subsidiary;


•	Upon the merger, consolidation or liquidation of the subsidiary into the Company or another subsidiary guarantor; and


•	Upon legal or covenant defeasance or the discharge of the Company’s obligations under the applicable indenture.

Because the guarantees are subject to release under the above described circumstances, they would not be deemed “full and unconditional” for purposes of Rule 3-10 of Regulation S-X. However, as these circumstances are customary, the Company concluded that it may rely on Rule 3-10 of Regulation S-X, as the other requirements of Rule 3-10 have been met.

The following tables present condensed consolidated financial statements for the parent company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, respectively.

The following is the condensed consolidating balance sheet as of January 25, 2014 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	348,411	$	8,673		$	641,603	$	—		$	998,687
Accounts receivable, net	126,232		28			92,000		—			218,260
Inventories	41,976		—			1,271		—			43,247
Intercompany receivables	—		471,290			—		(471,290		)	—
Other current assets	141,793		(56		)	10,225		3,976			155,938
Total current assets	658,412		479,935			745,099		(467,314		)	1,416,132
Property and equipment, net	444,958		464			13,945		—			459,367
Investment in subsidiaries	1,069,051		—			—		(1,069,051		)	—
Other non-current assets	1,616,186		82,548			3,604		—			1,702,338
Total assets	$	3,788,607	$	562,947		$	762,648	$	(1,536,365	)	$	3,577,837
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	57,131	$	—		$	21,507	$	—		$	78,638
Current portion of long-term debt	3,039		—			—		—			3,039
Intercompany payables	402,118		—			69,172		(471,290		)	—
Other current liabilities	284,922		5,289			114,877		3,976			409,064
Total current liabilities	747,210		5,289			205,556		(467,314		)	490,741
Long-term debt, net of current portion	595,694		—			—		—			595,694
Other non-current liabilities	101,374		—			45,699		—			147,073
Total liabilities	1,444,278		5,289			251,255		(467,314		)	1,233,508
Total stockholders’ equity	2,344,329		557,658			511,393		(1,069,051		)	2,344,329
Total liabilities and stockholders’ equity	$	3,788,607	$	562,947		$	762,648	$	(1,536,365	)	$	3,577,837

The following is the condensed consolidating balance sheet as of October 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	396,710	$	9,301	$	580,986	$	—		$	986,997
Accounts receivable, net	159,436		328		89,834		—			249,598
Inventories	40,072		—		5,272		—			45,344
Intercompany receivables	—		464,443		—		(464,443		)	—
Other current assets	127,709		7		11,395		1,753			140,864
Total current assets	723,927		474,079		687,487		(462,690		)	1,422,803
Property and equipment, net	457,054		567		15,319		—			472,940
Investment in subsidiaries	1,026,247		—		—		(1,026,247		)	—
Other non-current assets	1,626,031		95,624		3,993		—			1,725,648
Total assets	$	3,833,259	$	570,270	$	706,799	$	(1,488,937	)	$	3,621,391
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	68,190	$	28	$	20,000	$	—		$	88,218
Current portion of long-term debt	2,996		—		—		—			2,996
Intercompany payables	409,590		—		54,853		(464,443		)	—
Other current liabilities	335,261		7,075		125,360		1,753			469,449
Total current liabilities	816,037		7,103		200,213		(462,690		)	560,663
Long-term debt, net of current portion	596,208		—		—		—			596,208
Other non-current liabilities	74,201		—		43,506		—			117,707
Total liabilities	1,486,446		7,103		243,719		(462,690		)	1,274,578
Total stockholders’ equity	2,346,813		563,167		463,080		(1,026,247		)	2,346,813
Total liabilities and stockholders’ equity	$	3,833,259	$	570,270	$	706,799	$	(1,488,937	)	$	3,621,391

The following is the condensed consolidating statement of operations for the three months ended January 25, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	323,116		$	799		$	240,620		$	—		$	564,535
Intercompany revenues	6,393			—			3,541			(9,934		)	—
Total net revenues	329,509			799			244,161			(9,934		)	564,535
Cost of revenues	120,632			6,616			63,123			1,494			191,865
Intercompany cost of revenues	(15,174		)	—			25,108			(9,934		)	—
Total cost of revenues	105,458			6,616			88,231			(8,440		)	191,865
Gross margin (loss)	224,051			(5,817		)	155,930			(1,494		)	372,670
Operating expenses	192,196			6,658			53,820			(1,494		)	251,180
Intercompany operating expenses (income)	(43,164		)	(7,092		)	50,256			—			—
Total operating expenses	149,032			(434		)	104,076			(1,494		)	251,180
Income (loss) from operations	75,019			(5,383		)	51,854			—			121,490
Other expense	(10,392		)	(126		)	(14		)	—			(10,532		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	64,627			(5,509		)	51,840			—			110,958
Income tax expense	28,431			—			1,643			—			30,074
Equity in net earnings (losses) of subsidiaries	44,689			—			—			(44,689		)	—
Net income (loss)	$	80,885		$	(5,509	)	$	50,197		$	(44,689	)	$	80,884

The following is the condensed consolidating statement of operations for the three months ended January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Revenues	$	363,055		$	1,067		$	224,607	$	—		$	588,729
Intercompany revenues	9,781			—			3,355		(13,136		)	—
Total net revenues	372,836			1,067			227,962		(13,136		)	588,729
Cost of revenues	136,622			10,564			65,565		2,053			214,804
Intercompany cost of revenues	(9,119		)	—			22,255		(13,136		)	—
Total cost of revenues	127,503			10,564			87,820		(11,083		)	214,804
Gross margin (loss)	245,333			(9,497		)	140,142		(2,053		)	373,925
Operating expenses	213,763			10,821			58,103		(2,053		)	280,634
Intercompany operating expenses (income)	(32,604		)	(6,831		)	39,435		—			—
Total operating expenses	181,159			3,990			97,538		(2,053		)	280,634
Income (loss) from operations	64,174			(13,487		)	42,604		—			93,291
Other income (expense)	(25,931		)	(94		)	114		(391		)	(26,302		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	38,243			(13,581		)	42,718		(391		)	66,989
Income tax expense	85,852			—			2,392		—			88,244
Equity in net earnings (losses) of subsidiaries	26,744			—			—		(26,744		)	—
Net income (loss)	$	(20,865	)	$	(13,581	)	$	40,326	$	(27,135	)	$	(21,255	)

The following is the condensed consolidating statement of comprehensive income (loss) for the three months ended January 25, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	80,885		$	(5,509	)	$	50,197		$	(44,689	)	$	80,884
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—			—			(924		)	—			(924		)
Net gains reclassified into earnings	—			—			(31		)	—			(31		)
Net unrealized losses on cash flow hedges	—			—			(955		)	—			(955		)
Foreign currency translation adjustments	(63		)	171			(931		)	—			(823		)
Total other comprehensive income (loss)	(63		)	171			(1,886		)	—			(1,778		)
Total comprehensive income (loss)	$	80,822		$	(5,338	)	$	48,311		$	(44,689	)	$	79,106

The following is the condensed consolidating statement of comprehensive income (loss) for the three months ended January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	(20,865	)	$	(13,581	)	$	40,326		$	(27,135	)	$	(21,255	)
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—			—			(76		)	—			(76		)
Net gains reclassified into earnings	—			—			(179		)	—			(179		)
Net unrealized losses on cash flow hedges	—			—			(255		)	—			(255		)
Foreign currency translation adjustments	398			—			(778		)	—			(380		)
Total other comprehensive income (loss)	398			—			(1,033		)	—			(635		)
Total comprehensive income (loss)	$	(20,467	)	$	(13,581	)	$	39,293		$	(27,135	)	$	(21,890	)

The following is the condensed consolidating statement of cash flows for the three months ended January 25, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by (used in) operating activities	$	53,429		$	(628	)	$	56,668		$	—	$	109,469
Cash flows from investing activities:
Purchases of property and equipment	(10,816		)	—			(2,150		)	—		(12,966		)
Proceeds from sale of network adapter business	3,081			—			6,914			—		9,995
Proceeds from collection of note receivable	250			—			—			—		250
Net cash provided by (used in) investing activities	(7,485		)	—			4,764			—		(2,721		)
Cash flows from financing activities:
Payment of principal related to capital leases	(608		)	—			—			—		(608		)
Common stock repurchases	(140,380		)	—			—			—		(140,380		)
Proceeds from issuance of common stock	32,410			—			—			—		32,410
Excess tax benefits from stock-based compensation	14,335			—			—			—		14,335
Net cash used in financing activities	(94,243		)	—			—			—		(94,243		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(815		)	—		(815		)
Net increase (decrease) in cash and cash equivalents	(48,299		)	(628		)	60,617			—		11,690
Cash and cash equivalents, beginning of period	396,710			9,301			580,986			—		986,997
Cash and cash equivalents, end of period	$	348,411		$	8,673		$	641,603		$	—	$	998,687

The following is the condensed consolidating statement of cash flows for the three months ended January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	12,204		$	2,496		$	44,790		$	—	$	59,490
Cash flows from investing activities:
Purchases of property and equipment	(17,532		)	(23		)	(931		)	—		(18,486		)
Net cash acquired (paid) in connection with acquisition	(44,769		)	140			—			—		(44,629		)
Net cash used in investing activities	(62,301		)	117			(931		)	—		(63,115		)
Cash flows from financing activities:
Proceeds from senior unsecured notes	296,250			—			—			—		296,250
Payment of principal related to capital leases	(484		)	—			—			—		(484		)
Common stock repurchases	(47,530		)	—			—			—		(47,530		)
Proceeds from issuance of common stock	23,812			—			—			—		23,812
Excess tax benefits from stock-based compensation	2,192			—			—			—		2,192
Increase in restricted cash	(300,000		)	—			—			—		(300,000		)
Net cash used in financing activities	(25,760		)	—			—			—		(25,760		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(225		)	—		(225		)
Net increase (decrease) in cash and cash equivalents	(75,857		)	2,613			43,634			—		(29,610		)
Cash and cash equivalents, beginning of period	284,466			680			428,080			—		713,226
Cash and cash equivalents, end of period	$	208,609		$	3,293		$	471,714		$	—	$	683,616